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Fickle tax laws hurt foreign investors
November, 02nd 2015

It is absurd that foreign portfolio investors (FPIs) are facing fresh income-tax queries after the government granted them a retrospective exemption from the minimum alternate tax (MAT), based on the recommendations of the Justice A P Shah panel. However, FPIs will now reportedly have to convince tax authorities that they do not have a permanent establishment (PE) here to escape the tax. Foreign institutional investors, now FPIs, have been in relentless fear that tax authorities could construe their domestic custodian as a PE in India, making them liable to pay tax.

The government must come out with a clear communiqué on what constitutes a PE, and not leave it to interpretation. Waffling on the promise to scrap MAT on FPIs could create mayhem on the markets, needlessly. Do servers, for example, create a permanent presence? In the OECD’s view, a server — fixed, automated equipment that can perform important and essential business functions — may be sufficient to create a PE at the equipment location without the presence of human beings. Conflicting rulings by the authority of advance rulings have only added to uncertainty in this area of taxation. The government should clear the air to mitigate investor concerns.

In this case, FPIs have approached the Dispute Resolution Mechanism (DRP). The need is to ensure its robust functioning — the DRP has a pool of dedicated tax officers. India has slipped in the World Bank’s latest ease of doing business index in terms of paying taxes, and mounting disputes could be a major reason. The country’s tax regime must be reformed to minimise disputes. Our tax officers should be better trained to deal with complex transactions as India globalises. Predictability of tax conduct is on par with simplicity of the law.

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